Market Overview

Diversified Restaurant Holdings Reports Second Quarter 2018 Results

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Diversified Restaurant Holdings, Inc.
(NASDAQ:SAUC) ("DRH" or the "Company"), one of the largest franchisees
for Buffalo Wild Wings® ("BWW") with 65 stores across five
states, today announced results for its second quarter ended July 1,
2018.

Second Quarter Information (from continuing operations)

  • Revenue totaled $37.0 million
  • Same-store sales declined 6.4%
  • Net loss was $1.1 million or $0.04 per diluted share
  • Restaurant-level EBITDA(1) was $5.5 million, or
    15.0% of sales
  • Adjusted EBITDA(1) was $3.7 million
  • Total debt of $108.2 million was down $5.8 million for the
    year-to-date period

(1)

 

See attached table for a reconciliation of GAAP net
income(loss) to Restaurant-level EBITDA and Adjusted EBITDA

"Our second quarter results reflect the ongoing headwinds that the
Buffalo Wild Wings system is facing in the short-term while our
franchisor, under new ownership, works to realign media and promotional
strategies and reinvigorate the brand," commented David G. Burke,
President and CEO. "Despite the current challenges, we remain optimistic
about a turnaround in sales trends as a result of the improved corporate
marketing strategy planned for the upcoming football season along with
the many other positive developments that are being tested and
implemented, from advertising to information technology to menu
innovation. We also expect to realize cost benefits as we participate in
the leverage from our franchisor's larger scale and buying power. We
expect that the impact from these efforts will begin to be realized in
our results later in the year as changes are implemented and gain
traction."

Mr. Burke added, "Given the current operating environment and our
anticipated cash outlays for debt repayment and capital improvements, we
felt it was prudent to complete an equity offering. The approximately
$4.7 million in net proceeds that was recently raised provides
confidence that our current cash balance, in addition to our cash flow
from operations, will be sufficient to fund our operations, meet our
commitments on our existing debt and ensure ongoing debt covenant
compliance."

Second Quarter Results (from continuing operations)
(Unaudited, $ in thousands)     Q2 2018     Q2 2017     Change     % Change  
Revenue $ 37,039.1 $ 39,934.6 $ (2,895.5 ) (7.3 )%
Operating income $ 294.7 $ 721.3 $ (426.6 ) (59.0 )%
Operating margin 0.8 % 1.8 %
Net loss $ (1,140.2 ) $ (291.3 ) $ (848.9 ) 291.4 %
Diluted net loss per share $ (0.04 ) $ (0.01 ) $ (0.03 ) 300.0 %
 
Same-store sales (6.4 )% (3.7 )%
 
Restaurant-level EBITDA(1) $ 5,540.2 $ 6,617.7 $ (1,077.5 ) (16.3 )%
Restaurant-level EBITDA margin 15.0 % 16.6 %
Adjusted EBITDA(1) $ 3,673.1 $ 4,622.7 $ (949.6 ) (20.5 )%
Adjusted EBITDA margin 9.9 % 11.6 %
 
Year-to-date Results (from continuing operations)
(Unaudited, $ in thousands) YTD 2018 YTD 2017 Change % Change  
Revenue $ 76,572.0 $ 84,272.6 $ (7,700.6 ) (9.1 )%
Operating income $ 1,798.5 $ 3,087.9 $ (1,289.4 ) (41.7 )%
Operating margin 2.3 % 3.7 %
Net income (loss) $ (948.4 ) $ 504.2   $ (1,452.6 ) (288.1 )%

Diluted net income (loss) per share

$ (0.04 ) $ 0.02   $ (0.06 ) (300.0 )%
 
Same-store sales(1) (7.5 )% (2.0 )%
 
Restaurant-level EBITDA(2) $ 12,438.3 $ 15,042.3 $ (2,604.0 ) (17.3 )%
Restaurant-level EBITDA margin 16.2 % 17.8 %
Adjusted EBITDA(2) $ 8,776.8 $ 10,780.5 $ (2,003.7 ) (18.6 )%
Adjusted EBITDA margin 11.5 % 12.8 %
 
(1)   Please see attached table for a reconciliation of GAAP net income
(loss) to Restaurant-level EBITDA and Adjusted EBITDA
 

The decrease in sales in the second quarter was the result of reduced
traffic and the impact of the revenue deferral related to the Blazin'
Rewards loyalty program, partially offset by a new restaurant opening
late in second quarter of 2017 and a favorable calendar shift with
Easter falling in the 2018 first quarter versus the second quarter in
2017.

General and administrative expenses as a percentage of sales increased
to 5.8% in the second quarter from 5.2% due to lower sales volumes.
Food, beverage and packaging costs as a percentage of revenue decreased
140 basis points to 28.5%, primarily due to lower traditional chicken
wing costs. Average cost per pound for traditional bone-in chicken
wings, DRH's most significant input cost, decreased to $1.66 in the 2018
second quarter compared with $2.03 in the prior-year period.

Balance Sheet Highlights - Continuing Operations

Cash and cash equivalents were $2.5 million at July 1, 2018 compared
with $4.4 million at 2017 year-end. Capital expenditures were $0.9
million during the first six months of 2018 and were for minor facility
upgrades and general maintenance-type investments, as well as
improvements to prepare an open space for sub-lease adjacent to one of
our restaurants in the first quarter. DRH does not expect to build any
new restaurants nor is it expected to complete any major remodels in
2018. As a result, the Company anticipates its capital expenditures will
approximate $1.5 million in fiscal 2018.

Total debt was $108.2 million at the end of the quarter, down $5.8
million since 2017 year-end.

On July 24, 2018, the Company completed an underwritten registered
public offering of 6 million shares of common stock at a public offering
price of $1.00 per share, including 700,000 shares offered by a certain
selling stockholder, for total Company gross proceeds of $5.3 million.
DRH also granted the underwriter an option for a period of 30 days to
purchase up to an additional 450,000 shares of its common stock to cover
over-allotments, if any. DRH intends to use the net proceeds from the
offering for working capital and general corporate purposes, which may
include repayment of debt.

Webcast, Conference Call and Presentation

DRH will host a conference call and live webcast on Wednesday, August 8,
2018 at 10:00 A.M. Eastern Time, during which management will review the
financial and operating results for the second quarter, and discuss its
corporate strategies and outlook. A question-and-answer session will
follow.

The teleconference can be accessed by calling (201) 389-0879. The
webcast can be monitored at www.diversifiedrestaurantholdings.com.
A presentation that will be referenced during the conference call is
also available on the website.

A telephonic replay will be available from 1:00 P.M. ET on the day of
the call through Wednesday, August 15, 2018. To listen to the archived
call, dial (412) 317-6671 and enter replay pin number 13681116, or
access the webcast replay at http://www.diversifiedrestaurantholdings.com,
where a transcript will also be posted once available.

About Diversified Restaurant Holdings, Inc.

Diversified Restaurant Holdings, Inc. is one of the largest franchisees
for Buffalo Wild Wings with 65 franchised restaurants in key markets in
Florida, Illinois, Indiana, Michigan and Missouri. DRH's strategy is to
generate cash, reduce debt and leverage its strong franchise operating
capabilities for future growth. The Company routinely posts news and
other important information on its website at http://www.diversifiedrestaurantholdings.com.

Safe Harbor Statement

Some of the statements contained in this news release and the Company's
August 8, 2018 earnings conference call may constitute "forward-looking
statements" within the meaning of the Federal Private Securities
Litigation Reform Act of 1995. These statements reflect the current
views of our senior management team with respect to future events,
including our financial performance, business and industry in general.
Statements that include the words "expect," "intend," "plan," "believe,"
"project," "forecast," "estimate," "may," "should," "anticipate," and
variations of such words and similar statements of a future or
forward-looking nature are intended to identify such forward-looking
statements. We intend for our forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and we set
forth this statement in order to comply with such safe harbor provisions.

Forward-looking statements involve known and unknown risks and
uncertainties and are not assurances of future performance. Accordingly,
there are or will be important factors that could cause our actual
results to differ materially from those indicated in these statements,
including, among others, the risks and uncertainties disclosed in our
annual reports on Form 10-K, quarterly reports on Form 10-Q and other
filings made with the Securities and Exchange Commission. Any
forward-looking statements you read in this news release reflect our
views as of the date of this news release with respect to future events
and are subject to these and other risks, uncertainties, and assumptions
relating to our operations, results of operations, growth strategy, and
liquidity. You should carefully consider all of the factors identified
in this news release that could cause actual results to differ.

FINANCIAL TABLES FOLLOW

       

 DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

  CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended Six Months Ended
July 1, 2018     June 25, 2017   July 1, 2018     June 25, 2017
Revenue $ 37,039,073 $ 39,934,602 $ 76,572,030   $ 84,272,566
Operating expenses
Restaurant operating costs (exclusive of depreciation and
amortization shown separately below):
Food, beverage, and packaging costs 10,563,039 11,921,549 21,695,416 24,959,976
Compensation costs 10,167,398 10,168,376 20,332,053 21,133,906
Occupancy costs 2,806,370 2,838,826 5,750,210 5,732,677
Other operating costs 7,962,070 8,388,150 16,356,025 17,418,026
General and administrative expenses 2,137,772 2,066,409 4,359,741 4,423,375
Pre-opening costs 294,473 325,843
Depreciation and amortization 3,100,745 3,271,541 6,267,245 6,904,795
Loss on asset disposal 6,946   264,015   12,797   286,074  
Total operating expenses 36,744,340 39,213,339 74,773,487 81,184,672
 
Operating profit 294,733 721,263 1,798,543 3,087,894
 
Interest expense (1,609,987 ) (1,642,306 ) (3,256,031 ) (3,218,260 )
Other income, net 20,576   25,140   53,216   52,307  
 
Loss from continuing operations before income taxes (1,294,678 ) (895,903 ) (1,404,272 ) (78,059 )
Income tax benefit of continuing operations 154,468   604,560   455,891   582,296  
Income (loss) from continuing operations (1,140,210 ) (291,343 ) $ (948,381 ) $ 504,237
 
Discontinued operations
Loss from discontinued operations before income taxes (169,127 ) $ $ (132,592 )
Income tax benefit of discontinued operations   51,380     50,385  
Loss from discontinued operations (117,747 ) (82,207 )
 
Net income (loss) $ (1,140,210 ) $ (409,090 ) $ (948,381 ) $ 422,030  
 
Basic earnings per share from:
Continuing operations $ (0.04 ) $ (0.01 ) $ (0.04 ) $ 0.02
Discontinued operations $ $ (0.01 ) $ $
Basic net earnings per share $ (0.04 ) $ (0.02 ) $ (0.04 ) $ 0.02
 
Diluted earnings per share from:
Continuing operations $ (0.04 ) $ (0.01 ) $ (0.04 ) $ 0.02
Discontinued operations $ $ (0.01 ) $ $
Diluted net earnings per share $ (0.04 ) $ (0.02 ) $ (0.04 ) $ 0.02
Weighted average number of common shares outstanding
Basic 26,474,297 26,621,421 26,664,010 26,625,697
Diluted 26,474,297 26,621,421 26,664,010 26,625,697
 
       

 DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

  CONSOLIDATED BALANCE SHEETS

 
ASSETS

July 1, 2018
(UNAUDITED)

December 31,
2017

Current assets
Cash and cash equivalents $ 2,520,095 $ 4,371,156
Accounts receivable 278,876 653,102
Inventory 1,455,683 1,591,363
Prepaid and other assets 614,856   408,982  
Total current assets 4,869,510 7,024,603
 
Property and equipment, net 42,604,823 48,014,043
Intangible assets, net 2,248,372 2,438,187
Goodwill 50,097,081 50,097,081
Other long-term assets 808,145   185,322  
Total assets $ 100,627,931   $ 107,759,236  
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 3,454,367 $ 4,561,939
Accrued compensation 1,457,108 1,854,127
Other accrued liabilities 2,900,281 2,404,942
Current portion of long-term debt 11,570,551 11,440,433
Current portion of deferred rent 459,906   411,660  
Total current liabilities 19,842,213 20,673,101
 
Deferred rent, less current portion 2,354,782 2,208,238
Deferred income taxes 2,390,023 2,759,870
Unfavorable operating leases 470,788 510,941
Other long-term liabilities 1,835,244 2,346,991
Long-term debt, less current portion 96,585,984   102,488,730  
Total liabilities 123,479,034 130,987,871
 
Stockholders' deficit
Common stock - $0.0001 par value; 100,000,000 shares authorized;
27,282,385 and 26,633,299, respectively, issued and outstanding
2,648 2,625
Additional paid-in capital 22,156,108 21,776,402
Accumulated other comprehensive income (loss) 662,976 (283,208 )
Accumulated deficit (45,672,835 ) (44,724,454 )
Total stockholders' deficit (22,851,103 ) (23,228,635 )
   
Total liabilities and stockholders' deficit $ 100,627,931   $ 107,759,236  
 
   

 DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
Six Months Ended
July 1, 2018     June 25, 2017
Cash flows from operating activities
Net income (loss) $

(948,381

) $

422,030

 

Net loss from discontinued operations  

(82,207

)
Net income (loss) from continuing operations

(948,381

)

504,237

Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 6,267,245 6,904,795
Amortization of debt discount and loan fees 144,717 104,970
Amortization of gain on sale-leaseback (104,071 ) (67,696 )
Loss on asset disposals 12,797 286,074
Share-based compensation 387,785 181,922
Deferred income taxes (456,087 ) (632,681 )
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable 374,226 143,276
Inventory 135,680 33,233
Prepaid and other assets (205,874 ) 58,922
Intangible assets (20,000 ) (8,653 )
Other long-term assets (19,504 ) 40,822
Accounts payable (1,021,198 ) (75,913 )
Accrued liabilities 79,595 (941,964 )
Deferred rent 194,790   (4,448 )
Net cash provided by operating activities of continuing operations 4,821,720   6,526,896  
Net cash used in operating activities of discontinued operations   (82,207 )
Net cash provided by operating activities 4,821,720   6,444,689  
 
Cash flows from investing activities
Purchases of property and equipment (906,414 ) (3,571,296 )
Net cash used in investing activities (906,414 ) (3,571,296 )
 
Cash flows from financing activities
Proceeds from issuance of long-term debt 3,215,641
Repayments of long-term debt (5,758,311 ) (6,358,310 )
Proceeds from employee stock purchase plan 41,950 28,919
Tax withholdings for restricted stock units (50,006 )
Net cash used in financing activities (5,766,367 ) (3,113,750 )
 
Net decrease in cash and cash equivalents (1,851,061 ) (240,357 )
   
Cash and cash equivalents, beginning of period 4,371,156   4,021,126  
   
Cash and cash equivalents, end of period $ 2,520,095   $ 3,780,769  
 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
Reconciliation between Net Income (Loss) and Adjusted EBITDA and
Adjusted Restaurant-Level EBITDA
           
Three Months Ended (Unaudited) Six Months Ended (Unaudited)
      July 1, 2018     June 25, 2017     July 1, 2018     June 25, 2017
Net Income (Loss)     $ (1,140,210 )     $ (409,090 )     $ (948,381 )     $ 422,030  
+ Loss from discontinued operations 117,747 82,207
+ Income tax benefit (154,468 ) (604,560 ) (455,891 ) (582,296 )
+ Interest expense 1,609,987 1,642,306 3,256,031 3,218,260
+ Other income, net (20,576 ) (25,140 ) (53,216 ) (52,307 )
+ Loss on asset disposal 6,946 264,015 12,797 286,074
+ Depreciation and amortization     3,100,745       3,271,541       6,267,245       6,904,795  
EBITDA     $ 3,402,424       $ 4,256,819       $ 8,078,585       $ 10,278,763  
+ Pre-opening costs 294,473 325,843
+ Non-recurring expenses (Restaurant-level) 14,300
+ Non-recurring expenses (Corporate-level)     270,693       71,457       698,218       161,554  
Adjusted EBITDA     $ 3,673,117       $ 4,622,749       $ 8,776,803       $ 10,780,460  
Adjusted EBITDA margin (%) 9.9 % 11.6 % 11.5 % 12.8 %
+ General and administrative 2,137,772 2,066,409 4,359,741 4,423,375
+ Non-recurring expenses (Corporate-level)     (270,693 )     (71,457 )     (698,218 )     (161,554 )
Restaurant–Level EBITDA     $ 5,540,196       $ 6,617,701       $ 12,438,326       $ 15,042,281  
Restaurant–Level EBITDA margin (%) 15.0 % 16.6 % 16.2 % 17.8 %
 

Restaurant-Level EBITDA represents net income (loss) plus the sum of
non-restaurant specific general and administrative expenses, restaurant
pre-opening costs, loss on property and equipment disposals,
depreciation and amortization, other income and expenses, interest,
taxes, and non-recurring expenses. Adjusted EBITDA represents net income
(loss) plus the sum of restaurant pre-opening costs, loss on property
and equipment disposals, depreciation and amortization, other income and
expenses, interest, taxes, and non-recurring expenses. We are presenting
Restaurant-Level EBITDA and Adjusted EBITDA, which are not presented in
accordance with GAAP, because we believe they provide additional metrics
by which to evaluate our operations. When considered together with our
GAAP results and the reconciliation to our net income, we believe they
provide a more complete understanding of our business than could be
obtained absent this disclosure. We use Restaurant-Level EBITDA and
Adjusted EBITDA together with financial measures prepared in accordance
with GAAP, such as revenue, income from operations, net income, and cash
flows from operations, to assess our historical and prospective
operating performance and to enhance the understanding of our core
operating performance. Restaurant-Level EBITDA and Adjusted EBITDA are
presented because: (i) we believe they are useful measures for investors
to assess the operating performance of our business without the effect
of non-cash depreciation and amortization expenses; (ii) we believe
investors will find these measures useful in assessing our ability to
service or incur indebtedness; and (iii) they are used internally as
benchmarks to evaluate our operating performance or compare our
performance to that of our competitors.

Additionally, we present Restaurant-Level EBITDA because it excludes
the impact of general and administrative expenses and restaurant
pre-opening costs, which is non-recurring. The use of Restaurant-Level
EBITDA thereby enables us and our investors to compare our operating
performance between periods and to compare our operating performance to
the performance of our competitors. The measure is also widely used
within the restaurant industry to evaluate restaurant level
productivity, efficiency, and performance. The use of Restaurant-Level
EBITDA and Adjusted EBITDA as performance measures permits a comparative
assessment of our operating performance relative to our performance
based on GAAP results, while isolating the effects of some items that
vary from period to period without any correlation to core operating
performance or that vary widely among similar companies. Companies
within our industry exhibit significant variations with respect to
capital structure and cost of capital (which affect interest expense and
tax rates) and differences in book depreciation of property and
equipment (which affect relative depreciation expense), including
significant differences in the depreciable lives of similar assets among
various companies. Our management team believes that Restaurant-Level
EBITDA and Adjusted EBITDA facilitate company-to-company comparisons
within our industry by eliminating some of the foregoing variations.

Restaurant-Level EBITDA and Adjusted EBITDA are not determined in
accordance with GAAP and should not be considered in isolation or as an
alternative to net income, income from operations, net cash provided by
operating, investing, or financing activities, or other financial
statement data presented as indicators of financial performance or
liquidity, each as presented in accordance with GAAP. Neither
Restaurant-Level EBITDA nor Adjusted EBITDA should be considered as a
measure of discretionary cash available to us to invest in the growth of
our business. Restaurant-Level EBITDA and Adjusted EBITDA as presented
may not be comparable to other similarly titled measures of other
companies and our presentation of Restaurant-Level EBITDA and Adjusted
EBITDA should not be construed as an inference that our future results
will be unaffected by unusual items. Our management recognizes that
Restaurant-Level EBITDA and Adjusted EBITDA have limitations as
analytical financial measures.

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